Good news for California corporations: Gov. Brown signed Assembly Bill 154, which updates conformity to Federal Internal Revenue Code. The legislation was created for two reasons:
- To simplify state income tax returns, the filing and administration of California’s income tax laws.
- To provide relief to corporations facing income tax penalties.
Because it’s defined as an urgency statute, this bill is effective immediately, meaning taxable years on or after January 1, 2015. Keep reading for more details about the bill.
Provision 1: California’s Conformity to Federal Revenue Code
To summarize, this recently passed conformity bill means that California’s income tax laws for individuals and corporations will follow the federal Internal Revenue Code as of January 1, 2015. Of course there are a few exceptions, such as:
- The Worker, Homeowner, and Business Assistance Act of 2009, which includes an increase in penalty for failure to file a Partnership or S Corporation Return and requires certain tax return preparers to file electronically
- The Patient Protection and Affordable Care Act, which includes a modification of the itemized deduction for medical expenses
- The Tax Increase Prevention Act of 2014, which includes an extension of the Work Opportunity Credit
- The Achieving a Better Life Experience Act of 2014, which includes qualified ABLE programs and an inflation adjustment for certain civil penalties
Provision 2: Tax Payments for Corporations Expecting Carrybacks
In addition to the Internal Revenue Code conformity, this bill also adopts a section of the code allowing corporations that expect a net operating loss carryback to extend payment on the taxes for the previous year.
A net operating loss is when, “A company’s allowable tax deductions are greater than its taxable income, resulting in a negative taxable income. This generally occurs when a company has incurred more expenses than revenues during the period.” This operating loss can often be used to recover past tax payments or reduce future tax payments.
Unlike previous California law, the new bill allows corporations additional time to pay their taxes when they’re expecting a net operating loss carryback.
Provision 3: Penalty Relief for Large Corporations
California currently has a large corporate understatement penalty for understatements that exceed $1 million or 20 percent of the tax shown on an original return. An understatement is defined as, “The difference between the amount of tax shown on an original return and the correct amount of tax.”
There are already a couple of exceptions to California’s large corporate understatement penalties, but this new bill provides two more.
Want to know more about this new conformity bill and how it may affect your business? Contact us for additional details!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Partial Manufacturer’s Exemption for Sales Tax. To learn more, contact us today at www.MilesConsultingGroup.com.
